OREANDA-NEWS. Fitch Ratings has assigned an expected 'A+(EXP)' senior unsecured rating to Beijing Energy Investment Holding Co., Ltd's (BEIH; A+/Stable) proposed euro-denominated bond.

The bond will be issued by Beijing Energy Investment Holdings Limited (BEI), a wholly owned offshore subsidiary of Beijing Energy Investment Holding (Hong Kong) Co Ltd (BEIHHK). BEIHHK is in turn 100%-owned by BEIH. In place of a guarantee, BEIH has granted a keepwell, liquidity support, and equity interest purchase covenants deed to ensure BEIHHK has sufficient assets and liquidity to meet its obligations under the proposed offshore bond.

The final rating is contingent upon the receipt of final documents conforming to information already received.

BEIH's ratings are strongly linked to Fitch's internal credit assessment of Beijing Municipality. The municipality's budgetary performance has been robust. It has a strong and well-diversified socio-economic profile, and a close relationship with the China sovereign (A+/Stable) due to the capital city status. BEIH's ratings reflect its 100% ownership by Beijing Municipality, and the operational and strategic linkages between BEIH and the city. BEIH is responsible for ensuring power security and providing district heating to core parts of Beijing, and benefits from significant financial assistance from Beijing Municipality.

KEY RATING DRIVERS
Vital Strategic Importance: Fitch sees BEIH's importance to Beijing Municipality as stemming from its leading role in operating the largest district heating network covering the central area of the city, including key government offices and foreign consulates. BEIH also provides 65%-75% of the city's electricity demand, with a large portion from gas-fired cogeneration capacity located within Beijing. BEIH should continue to be important over the long term because of the country's drive towards cleaner power generation to reduce pollution, and the company's leading role in the consolidation of heating operators.

Policy Vehicle: BEIH has taken a leading role in building natural gas co-generators to help Beijing reduce emissions and phase out coal-fired thermal power capacity within the city centre. BEIH's role in leading consolidation in the heating sector is also aimed at reducing pollution by merging less efficient companies. The Beijing government is also using the company as a conduit to provide heating at prices lower than operating costs.

Strong Fiscal Support: BEIH has been receiving substantial tangible support from the Beijing government, due to its public utility function. BEIH has received subsidies related to district heating and power generation segments, and capex for improvement in district heating infrastructure assets. The total recorded government grant for 2014 amounted to CNY3.4bn. BEIH also enjoys tax exemptions for its gas-fired power plants for revenue from sale of heat to residential end-users and off-take priority for its clean-energy power generation. BEIH has also benefitted from zero cost asset transfers from the Beijing government, including Jingmei Group, heating assets and a branch heating network over 2010-2014.

High Capex Programme: Fitch expects capex to be above CNY20bn, higher than the CNY17.7bn in 2014. Most of the capex will be within Beijing to support the construction of new gas-fired plants and expansion of its centralised heating system. The remainder will go to projects outside the city, but which aim essentially to supply power to Beijing. A large part of the anticipated capex is expansionary, with maintenance capex likely to be less than CNY5bn per year.

Moderate Financial Profile: The large capex programme will result in negative FCF over the next few years. Fitch expects FFO fixed-charge coverage to remain at around 3.4x (2014: 3.9x) and FFO-adjusted net leverage sustained at around 4.8x (2014: 5.0x) in the medium term. The company's standalone financial profile is in line with peers rated in the 'BB' category.

Neutral on Merger with Jingmei: Beijing SASAC transferred Jingmei Group to BEIH in December 2014 at zero cost. Jingmei Group was engaged primarily in exploitation and sales of coal, and with an exposure to the real estate and logistic businesses. The merger was to create a large energy enterprise group in Beijing, which aligns with the central government's policy towards integration of "coal" and "power" and achieving synergies between the existing resources. Such a merger should enhance BEIH's strategic position in ensuring Beijing's power security.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for BEIH include:
- Power generation capacity to grow by the low- to mid-teens in the short term
- Coal-power tariff linkage intact
- Capex to remain high, above historical levels
- Continued support from the Beijing government in the form of subsidies and capex support

RATING SENSITIVITIES
Negative rating action could follow a lowering of Fitch's internal assessment of the creditworthiness of the Beijing Municipality, or upon evidence of a weakening of BEIH's legal, operational and strategic linkages with the Beijing Municipality.

Positive rating action is likely upon an upgrade of Fitch's internal assessment of the creditworthiness of the Beijing Municipality, provided BEIH's strong operational and strategic linkages with the municipality remain intact.